Insurance to Value

Definition - What does Insurance to Value mean?

Insurance to value is a concept used by insurers to determine how much to pay for losses are covered under homeowners' policies. In general, insureds are required to have coverage in an amount that is at least 80% as much as the value of their home. If coverage is less than 80% of that value, payable amounts on claims will be reduced from the usual standard, which is replacement cost less deductible.

Insuranceopedia explains Insurance to Value

Two examples illustrate how the payable amount is determined. In these examples, the insured has less than the required 80% to value, so the insurer will pay the larger of (1) the actual cash value or (2) an amount based on the fraction of insurance carried to insurance required. Note that the deductible is subtracted from the loss before the percentage of coverage is applied; this is typical for homeowners' policies and yields a slightly higher amount than if the deductible is applied after the percentage of coverage is applied.

1) Replacement value of homeowner’s house is $400,000, so she is required to have coverage for at least $320,000 (80% of the house’s value); in fact she has only $275,000. Her roof is heavily damaged in a wind storm. Full cost to replace the roof is $9,000; actual cash value of the roof is $8,000 (it is not new but is not too old). The deductible on the policy is $500. As the insured has less than 80% insurance to value, the amount paid by the insurer is calculated:

First, the amount based on the fraction of insurance carried to insurance required:

275,000 / 400,000 = 85.9%

9,000 - 500 = 8,500

85.9 x 8,500 = $7,302

Actual cash value: $8,000

As actual cash value is the higher amount, the insurer will pay $7,500 (actual cash value less deductible: 8,000 - 500). Note that if the insured had had the minimum required policy amount of $320,000, the insurer would have paid replacement cost less deductible, or $8,500 (9,000 - 500).

2) The second example is the same as the first except that the roof is older and has an actual cash value of $6,000.

Again first, the amount based on the fraction of insurance carried to insurance required:

275,000 / 400,000 = 85.9%

9,000 - 500 = 8,500

85.9 x 8,500 = $7,302

Actual cash value: $6,000

As the amount based on the fraction of insurance carried to insurance required is the higher amount, the insurer will pay $7,302. Again, if the insured had had the minimum required policy amount of $320,000, the insurer would have paid replacement cost less deductible, or $8,500 (9,000 - 500).